Putting Real Money Into Air (Seriously)

Even though many investors go insanely bullish for merger and acquisition announcements, these transactions don't always signal happy times ahead in the near term (and sometimes, not ever). Packaging concern Sealed Air (NYSE: SEE) has suffered mightily after an expensive acquisition, but that's given us a cheap price for a company that's not putting on airs when it comes to sustainable innovations.

The businessElmwood Park, N.J.-based Sealed Air is more familiar than you realize. It provides packaging solutions like Cryovac for food, Jiffy mailers, and -- wait for it, this one's good -- Bubble Wrap.

Sealed Air fits into the prosocial portfolio I'm managing for Fool.com for several reasons. Sealed Air's food packaging solutions help put off spoilage and therefore reduce food waste, which is a huge problem in America and across the globe, even as many go hungry. In fact, solutions for food waste and world hunger are big concerns for the company.

The company's SmartLife initiative helps educate people about how environmentally dangerous and unsustainable such waste is, despite the conventional wisdom that "biodegradable" is always good. The sustainability problems encompass everything from the methane gas generated in landfills by biodegradable food waste to the water and other resources used in growing food to the energy used to transport it.

Sealed Air has been working to make its business more sustainable according to its SmartLife site. It's fashioning more products out of recycled materials as well as making them recyclable, and it's launching biodegradable and compostable packaging materials, including revamping its Bubble Wrap to this end.

In addition, Sealed Air has made it onto Fortune's annual World's Most Admired Companies list, and claimed the number one spot among 10 industry peers.

Why I'm buyingSealed Air's shares have been seriously deflating. About a year ago, it acquired cleaning and hygiene solutions company Diversey for $2.9 billion, and problems with that acquisition have hampered Sealed Air, leading up to its highly discounted stock price. Sealed Air also upped its debt load in connection to that transaction.

Trading at 11 times forward earnings, Sealed Air's at a much cheaper valuation than rival Ecolab (NYSE: ECL) , which has a forward price-to-earnings ratio of 18, and is a tad cheaper than competitors Sonoco Products (NYSE: SON) and Bemis (NYSE: BMS) , with forward P/E ratios of 12 and 14, respectively.

If Sealed Air can get its act back together, adequately integrate the Diversey business and get its profitability going again, then its shares are extremely cheap right now. It's not like the Diversey business hasn't added to sales; in the last 12 months, Sealed Air's revenue has surged by 54.3%.

There's speculation that Sealed Air is researching "strategic options" and might be a potential takeover target for Ecolab or Dow Chemical (NYSE: DOW) . (Incidentally, the company recently announced the retirement of CEO William Hickey in March; he will be replaced by a Dow executive.) However, while some investors may be buying shares due to the possibility of a premium-priced takeover, my thesis centers on the company's beaten down stock price and its work toward sustainable business practices.

As an added bonus, Sealed Air brings a dividend to the table; its trailing annual dividend yield was 3.5%.

And now, the risksSealed Air's stock's been brutalized as the company reported net losses for the last three quarters. The company's got its work cut out for it in reversing this disturbing trend, and bringing on a new CEO in the midst of all this isn't exactly ideal.

Last quarter, Sealed Air really upset investors when it missed analysts' estimates and lowered its 2012 outlook. Problems in Europe floated to the surface, as has been the case with many companies. Like many others, Sealed Air is subject to global macroeconomic risks right now; it has plenty of exposure to overseas markets, given its operations in 62 countries and the fact that a majority of its net sales are generated outside the U.S.

As previously mentioned, Sealed Air's debt load is a major risk to bear in mind. Although I usually like to focus on companies with strong balance sheets, note that this company lacks that particular attribute at the moment. Its debt-to-capital ratio has surged to 63.5% after the Diversey acquisition. Sealed Air has just $503.9 million in cash and $4.99 billion in debt. S&P recently cut Sealed Air's credit rating, too.

Foolish bottom lineTough times can yield great buying opportunities, and we can look forward to the possibility of even greater rewards when the company at hand has lofty goals in corporate social responsibility and sustainability. Although some of its business feels up in the air at the moment, Sealed Air adds another diversified layer to my prosocial portfolio, so it's time to take a swing at this discounted stock.

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Sealed Air did actually come to a settlement agreement about this issue. From what I can tell (see Note 17 in the most recent 10-K, it's quite some bulky legalese reading on the last, what, 10 or so years of this issue? What a mess) the only problem is whether the agreement will be challenged once W.R. Grace comes out of bankruptcy, which could change the company's obligations here.

Apparently Grace is nearing emerging from bankruptcy and Sealed Air is monitoring that situation. I ran across an interesting investor presentation recently in their filings, and on pp 11-12, it talks about the Grace settlement situation: